Form CSR 2: Govt's New Approach To Redefine Corporate Social Responsibility

On 11th February, 2022, the Central Government came up with amendment to the Companies (Accounts) Rules, 2014. The notification significantly redefines the corporate social responsibility regime for India inc. 

The amended rules mandate a company covered u/s 135 (1) of the Companies Act, 2013 to furnish a report on Corporate Social Responsibility in form CSR–2 to the Registrar for the preceding financial year (2020–2021) and onwards as an addendum to form AOC–4. 

For the uninitiated, form AOC 4 pertains to filing the company's financial statements with the RoC.

To put it simply, certain class of companies ⁽¹⁾ are now statutorily required to file a comprehensive 11-page report giving details of the CSR amount spent in the three preceding financial years on ongoing projects. Additionally, the newly introduced form obligates the companies to provide justification if the company has failed to utilise its CSR funds.

Reasons behind the comprehensive CSR exercise

The corporate landscape has been a witness to numerous governance failures and million-dollar scams. From floating shell companies for evading tax to fudging account books, we have seen small jugaads leading to gigantic corporate disasters under the previously thin legal and governance frameworks.

Although inserting a CSR provision in the Companies Act of 2013 has been hailed as a welcome step, it was not devoid of shortcomings. 

News reports are replete with cases of using NGOs and charitable institutions as vehicles to legalise and launder black money into the system. And the CSR framework sans the comprehensive reporting requirements became a breeding ground for certain notorious companies to legitimise illegal money.

Rerouting unaccounted income through a company operated Trust to the parent company became a common instance of misusing the CSR law. The disclosure norms, in particular, lacked clarity in terms of accounting for CSR expenditure.  As Probal Bhaduri, Managing Partner, Lumiere Law Partners puts it, 

"the new form brings about a new dimension of accountability for the companies. Views regarding CSR expenditures have been the centre of immense scrutiny in the past few years. The form is a deep dive into the CSR expenditures undertaken by a company and seeks to prevent the misuse of CSR as a money laundering/ self-financing tool", he adds.

So, what does form CSR-2 mean for corporate India?

A cursory look at the onerous form CSR 2 can make any compliance manager feel a little more burdened. When one comes to think of it, disclosures under the new company law regime have only swelled in the past few years. However, closer scrutiny of the new compliance requirements gives a glimpse of the government’s motive behind the new reporting framework.

From details regarding net profits for the previous financial years to adequate disclosures on the company’s website, the form ticks all the right boxes when it comes to seeking transparency and corporate accountability. However, the usual troops play out here as well (read increased cost compliance and potential overlapping).

Concurring a similar sentiment, Pritha Jha, Partner, Pioneer legal says, "there is certainly information that needs to be provided in the form that overlaps with requirements under other reporting forms, for e.g. the annual reports. However, the form in itself is 11 pages and requires detailed information about CSR spending. Although this is definitely a burden for companies, this will likely result in better thought through CSR policies for the future. It would be helpful though if the form could be shortened by reducing redundancies."

While form CSR 2 looks to fill the gaps when it comes to transparent and sound CSR disclosures, it will add to the ever-increasing compliance cost and responsibilities. If numbers tell a story, an analysis done by a leading HR service provider pointed towards 25,537 compliances and 2,282 regulatory filings in central Acts alone.

Even if we give a leeway to the government for taking measures to remove certain redundant compliances, corporate India still faces the surmounting compliance challenge.

There is no doubt that the government will be able to keep a tab on CSR activities but will it prove to be the effective elixir in curbing the complex web of money activities.

Well, only time and experience can tell.

1. Every company having a net worth of 500 crores, or a minimum Turnover of 1000 crore or a Net profit of at least 5 crores in the preceding financial year is required to spend a minimum 2 percent of their three-year average annual net profits towards CSR activities on a yearly basis.